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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

Did Oil Prices Just Find a Bottom?
March 14, 2016

At 2,717 feet, Burj Khalifa looms over downtown Dubai.

At 2,717 feet, Burj Khalifa looms over downtown Dubai.

As the Middle East’s main business hub, Dubai is the most populous city in the United Arab Emirates (UAE) and home to the world’s tallest manmade structure, the 163-story Burj Khalifa, which climbs to a neck-craning 2,717 feet. Designed by Adrian Smith, who attended Texas A&M University, the Khalifa Tower is an engineering marvel and stands as a symbol not only of the futuristic and forward-thinking look of this oil-rich country but also its emphasis on seeking intellectual capital from all over the world.

Last week I had the pleasure of attending the annual Young Presidents’ Organization (YPO) event, held this year in Dubai, where I learned best practices on leadership as well as how to strike the right balance between business and family life. The YPO has 24,000 peer-to-peer members who together employ 15 million people across 130 countries and generate $6 trillion in revenue every year.

It was an enriching experience, equaled only by my admiration for what the UAE has managed to accomplish with its oil revenues. Tall construction cranes can be seen in every corner of Dubai, signaling urban growth. There are plans to expand its efficient light rail system, which shuttled me from the airport to downtown for only $1. I was happy to see many of the train stations colored gold.

A sleekly designed monorail station in Dubai

Five Guys in Dubai

As is the case in China and elsewhere, spending on infrastructure is key for long-term sustainable growth. Countries and city-states such as Singapore, Hong Kong and now Dubai have spent wisely on new airports, sea ports, subways, light rail and hospitals—all wise fiscal spending that has always given the U.S. a huge advantage. With oil revenues, UAE leadership has paid for citizens to earn degrees in America and military training in the U.S., including San Antonio, Texas. The city of Dubai has a massive U.S. naval base for regional security.

The Dubai Mall, the second-largest in the world, is a wonder to explore. It contains 1,600 stores and restaurants from the U.S. and Europe and also features the Dubai Aquarium, one of the world’s largest. You truly feel as if you are in America, with the most popular restaurants being Five Guys Burgers and Fries, the Cheesecake Factory and U.S. pizza chains. I was surprised to see Tex-Mex food being delivered on motorcycles.

The Palazzo Versace is one of Dubai's leading 5-star fashion hotels.

This is the sort of extravagance and attention to detail travelers have come to expect from the country’s most popular attractions. At the Palazzo Versace hotel in Dubai, for instance, visitors can beat the desert heat by relaxing in air-conditioned sand. In Abu Dhabi, the Shaikh Zayed Grand Mosque is believed to have the world’s largest carpet, capable of accommodating more than 44,000 worshippers. The intricate craftsmanship of the marble and gold along the walls and columns is breathtaking to behold.

The Sheikh Zayed Mosque

The Impact of Electronic Payments

I also want to point out that the digital banking system has made a huge impact on the UAE’s economy. I just read an article in the Khaleej Times newspaper, reporting that electronic payments have boosted the UAE’s GDP by $3.7 billion in five years. This increase is indicative of a trend of rising card usage across many countries, as you can see in the chart below.

In the same edition of the newspaper, I was interested to read that for the third year in a row, Singapore has been listed as the most expensive city in the world, followed by Zurich and Hong Kong.  According to the article, “Falling commodity prices have created deflationary pressures in some countries, but in others, currency weakness caused by these falls has led to spiraling inflation.”

Light at the End of the Tunnel? The IEA Calls a Bottom in Oil Prices

Despite its relatively small size in population and land mass, the UAE is the world’s sixth-largest oil producer, following the U.S., Saudi Arabia, Russia, China and Canada. Among Organization of Petroleum Exporting Countries (OPEC) members, it’s the second-largest, after Saudi Arabia.

These rankings might very well rise in the coming years, however, as the Middle Eastern country plans to expand production between 30 and 40 percent by 2020, even as Brent crude prices have struggled to crack $40 per barrel.

But on a global scale, oil production is finally dropping—and that’s constructive for prices. In a report released on Friday, the International Energy Agency (IEA) writes that “prices might have bottomed out,” citing a February decline in both OPEC and non-OPEC output and hopes of U.S. dollar weakness.

Although I’m cautious, the current recovery is in line with oil’s seasonality trends for the five- and 15-year periods, which show that prices have risen between March and the beginning of the busy summer travel season.

West Texas Crude Oil Historical Patterns
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The PHLX Oil Service Sector Index has gained 4.4 percent since the beginning of the year, while prices have rallied above their 50-day moving average, touching three-month highs.

Oil Responds to Easonality Trend
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As the IEA points out, this rally is being spurred by optimism that OPEC and Russia can agree on a production freeze—not a cut, as some people think. A meeting date has yet to be decided upon, however, presumably because Iran announced it will not agree to an output freeze until it reaches its pre-sanction market share.

Like Iran, Saudi Arabia has resisted capping production. To plug up the deficit, it’s reportedly seeking up to $8 billion from international banks, the first time it has done so in more than a decade. The kingdom is also considering issuing foreign bonds and listing a part of its state oil company, Saudi Arabian Oil, or Aramco.

With WTI up 25 percent in 2016 and 3 percent in March, investor sentiment has improved since October, when it crossed into “panic” territory for the first time since 2011.

Investor Sentiment Improving after October Dip
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U.S. Companies Looking for $50 Per Barrel

To remain profitable, most U.S. producers need oil prices to be above $50 per barrel—a level we haven’t seen in eight months. In such an environment, U.S. oil companies are finally beginning to make meaningful production cuts, with the IEA expecting producers to remove more than half a million barrels per day from the market this year. In December, the monthly year-over-year change in production turned negative for the first time since September 2011.

U.S. Oil Production Dropping Off
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The number of North American rigs in operation fell below 400 for the first time since December 2009, according to Baker Hughes, helping to support prices.

Oil Prices Jump on Further Rig Count Declines
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Until now, per-well productivity has been slow to budge. Years of $100-per-barrel oil incentivized companies to develop new ways to extract crude, including fracking, and these technological advancements have greatly increased efficiency. Today, not only can a new well be drilled in record time, it can also produce four to five times what it could have only five years ago.

What Oil Companies Can Learn from Airlines

Highly-leveraged companies across the globe have had little choice but to trim their workforces, curb expenditures and let go of undeveloped projects. According to consulting firm AlixPartners, overall capital spending fell 20 percent in 2015, with a further decline of at least 30 percent expected this year.

Global Oil Companies Slash Exploration and Production Spending
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These adjustments, the most severe since the oil rout in the 1980s, have saved or raised global exploration and production (E&P) companies $130 billion, says Deloitte Consulting. But this won’t be enough for many companies: Nearly a third of all pure-play E&P companies worldwide are at high-risk of bankruptcy this year.

That’s not necessarily a bad thing. A little over a decade ago, the airline industry also found itself in extreme duress. A large percentage of carriers landed in bankruptcy court, and a wave of consolidation swept through the industry. Today, airlines are positing record quarterly profits.

In the past year, we’ve already seen some huge mergers and acquisitions in the oil industry—think Dutch Royal Shell and BP, as well as the proposed Halliburton and Baker Hughes deal. It’s likely we’ll see many more in the coming months. In the meantime, short of geopolitical turmoil, a coordinated production cap agreement among OPEC and non-OPEC countries might be the only option to firm up prices.

 

Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The PHLX Oil Service Sector Index (OSX) is a price weighted index composed of companies involved in the oil services sector.

The Credit Suisse Risk Appetite Index is a sentiment indicator designed by Credit Suisse comparing risk-adjusted returns across a wide spectrum of global assets.

Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2015: Baker Hughes Inc.

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To Jumpstart Its Economy, China Embraces… Reaganomics?
March 7, 2016

Chinese President Xi JinpingChinese President Xi Jinping is about to tell millions of government workers: “You’re fired.”

Reuters reported last week that China plans to lay off between five and six million state workers over the next two to three years, in an effort to curb overcapacity in what’s being described as “zombie companies”: those that are being kept alive on bank loans despite bleeding revenue. Close to two million of these layoffs will come from the coal industry alone.

The layoffs are part of a series of sweeping reforms that were announced ahead of the National People’s Congress (NPC) meeting. Every year, close to 3,000 Chinese officials and executives from all over the country convene in Beijing to develop and assess the status of the country’s Five-Year Plan. In response to worldwide demands that China manage its slowing economy better, President Xi Jinping this year has proposed what he calls “supply-side structural reform.”

And if that sounds a little like Reaganomics, that’s kind of the point.

Besides layoffs, Xi’s plan includes tax cuts, deregulation and reductions in state spending—economic policies you might expect to come from the desk of Reagan or Thatcher. We might also expect the results of these policies to be the same in China as in the U.S. and United Kingdom in the 1980s: a boom in entrepreneurship and innovation.

These reforms come at a crucial time for China, whose manufacturing sector has been in contraction mode for a year now as the country’s economy shifts toward domestic consumption. In February, China’s purchasing manager’s index (PMI) fell to 48.0 from 48.4 in January.

Chinese Manufacturing in Contraction Mode for 12 Straight Months
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We closely follow government policy changes in China for a number of reasons. For one, its economy is the second largest in the world, and when based on purchasing power parity (PPP), its GDP is actually the largest, followed by the U.S., India and Japan. China’s economy, then, has a huge effect on the rest of the world, touching everything from commodities demand to consumption.

In 2015, total retail sales in China touched a record, surpassing 30 trillion renminbi, or about $4.2 trillion. By 2020, sales are expected to climb to $6.4 trillion, representing 50 percent growth in as little as five years. This growth will “roughly equal a market 1.3 times the size of Germany or the United Kingdom,” according to the World Economic Forum (WEF).

One of the main reasons for this surge in consumption is the staggering expansion of the country’s middle class. In October, Credit Suisse reported that, for the first time, the size of China’s middle class had exceeded that of America’s middle class, 109 million to 92 million. As incomes rise, so too does demand for durable and luxury goods, vehicles, air travel, energy and more.

109 Million - For the first time, the size of China's middle class has overtaken the U.S., 109 million compared to 92 million.

But middle-income families aren’t the only ones growing in number. The WEF estimates that by 2020, upper-middle-income and affluent households will account for 30 percent of China’s urban households, up from only 7 percent in 2010.

Gold’s Back in a Bull Market at the BMO 25th Metals and Mining Conference

Last week I returned from sunny Florida, where I had been attending the BMO Metals and Mining Conference, widely regarded as the best in the business. Sentiment toward gold was very optimistic, as I told Kitco News’ Daniela Cambone in last week’s edition of Gold Game Film. As always, Daniela did a fabulous job covering the event, interviewing all of the CEOs and other mining executives.

Frank Holmes: This Rally Has Room to Grow - Kitco News - 25th Global Metals & Mining Conference

The yellow metal is 2016’s best-performing asset class so far, having climbed more than 19 percent. It just had its strongest February since 1975.

What’s more, gold appears as though it’s back in a bull market, often defined as a 20 percent gain from a recent trough. Short-term, though, it’s way overbought, so a correction at this point would be healthy.

Follow the Money, Follow the Gold Flows

At the BMO Conference, I had the pleasure of meeting and speaking with my friend Pierre Lassonde, cofounder of Franco-Nevada, and company CEO David Harquail. Pierre told me that for every $1 billion that flows into the SPDR Gold Trust (GLD), the price of gold rises approximately $30 per ounce. Since the beginning of the year, we’ve seen about $9.3 billion flow into the GLD. During the same period, gold has risen 20 percent from its six-year low of $1,049.60 per ounce on December 17 to end Friday trading at $1,259.25.

The first breakout signal occurred on December 31, 2015, when money started to flow into gold, and the second important signal was when gold flows surpassed the 200-day, or 10-month, average, on February 1, 2016. Since the beginning of the year, gold has surged.

Outstanding Shares in the SPDR Gold Trust
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Like bullion, gold miners had a particularly gainful February, its best since 1998. The NYSE Arca Gold Miners Index rose an impressive 38.7 percent, compared to the 0.4 percent the S&P 500 Index lost in February. Year-to-date, production leaders Goldcorp, Newmont Mining and Barrick—which has recently lowered its debt-to-equity ratio—are thriving with prices pushing higher.

Gold Rush for Miners
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Gold is surging right now for a number of reasons, many of which I’ve covered in the last few weeks, including stronger inflation, negative interest rates and other components of the Fear Trade.

Global growth concerns have also spooked many investors, driving them into gold’s arms. Last week we learned that the global PMI fell pretty dramatically to a neutral 50.0 reading in February, down from 50.9 in January. Anything below 50.0 indicates manufacturing deterioration, and while I hope we don’t cross into that territory, the PMI has been trending downward over the last two years. We haven’t seen sub-50 readings since 2012.

Manufacturing Activity Stumbles in February
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As I’ve discussed many times before, we use PMIs to help forecast global manufacturing conditions three to six months out. (I’ve likened the economic indicator to the high beams on your car, with GDP serving as your rearview mirror.) That the PMI remains below its three-month moving average doesn’t bode well for commodities or energy in the short-term. The weakness underscores the need for global economies to reform their tax systems and relax regulations, as China is attempting to do.

Comparing Countries’ Compliance Complexity

South America, which represents 10% of world GDP, has some of the most difficult economies for navigating red tape.The TMF Group, a professional services firm, just released its annual Global Benchmark Complexity Index, which ranks countries according to the complexity of their business compliance standards. As you might expect, dominating the top 10 most complex governments are those found in South America, including Brazil, Bolivia, Colombia and, at number one, Argentina.

Colombia climbed—or fell, depending on your perspective—18 spots, from 21 to three, mainly due to the tax changes its government rolled out last year courtesy of its socialist finance minister, Mauricio Cárdenas Santa Maria. The South American country is now in the process of raising its income tax incrementally, from 40 percent this year to 43 percent in 2018, and with the agreement of other countries, it may now also tax the wealth its citizens hold in other jurisdictions (very similar to FATCA, or the Foreign Account Tax Compliance Act, here in the U.S.).

For the third consecutive year, Argentina ranks as the world’s most complex country in terms of business compliance. Back in November I wrote about the election of free-market advocate Mauricio Macri, expressing my hopes that the new president can bring significant reforms to the country’s business infrastructure and eliminate corruption. I’m still encouraged, but as we all know, political change is fraught with challenges and can take some time.

Champagne socialist: Colombian Finance Minister Mauricio Cardenas Santa Maria

It’s a shame that Argentina, Colombia, Brazil and many other resource-rich countries in South America can’t move more quickly to eliminate the roadblocks that stand in the way of growth and prosperity. Brazil, which is on course for its worst recession in over a century, shrank 3.8 percent in 2015, the largest decline since 1990, and its central bank expects it to shrink a further 3.45 percent this year.

Reform would benefit not just their own capital markets but the world economy as a whole. South America represents about 10 percent of the global economy, meaning a 1 or 2 percent rise or fall in GDP could have a significant effect on world GDP.

As a reminder, I will be in Carlsbad, California, April 13-16, speaking at the Oxford Club’s 18th Annual Investment U Conference. I’m honored to be joined by other respected minds in the world of investing, including Alexander Green, Marin Katusa and Keith Fitz-Gerald. Reserve your seats today by clicking the link above. I hope to see you there!

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.  The index benchmark value was 500.0 at the close of trading on December 20, 2002.

The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The Global Benchmark Complexity Index ranks 95 jurisdictions in order of business compliance complexity.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2015: Newmont Mining Corp.

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10 Numbers to Know for the Chinese New Year
February 8, 2016

Happy Chinese New Year! 2016: Year of the Fire Monkey

For decades now, China has been the leading driver of global growth, consuming unfathomable amounts of raw materials and commodities.

Today, the Asian giant is undergoing dramatic changes, as its government deepens reforms and opens the country’s economy up to foreign investment. The size of its middle class is rapidly expanding in size, giving a huge boost to domestic consumption. And with the creation of the Asian Infrastructure Investment Bank (AIIB) and the renminbi’s inclusion in the International Monetary Fund’s (IMF) reserve currency, China’s role in global financial markets is growing in importance.

No one can deny that challenges lie ahead, but opportunities are still abundant.

With this in mind, I’ve put together 10 figures to know as China enters a new year.

9th

As the ninth animal in China’s 12-zodiac cycle, the monkey is considered confident, curious and a great problem-solver. But 2016 is also the year of the Fire Monkey, which adds a layer of strength and resilience.

2.9 Billion

It’s been called the world’s largest annual human migration. “Chunyun,” or the Spring Festival, refers to the period around the Chinese New Year when people travel by plane, train and automobile to visit friends and family. Between January 21 and March 3, nearly 3 billion trips will be made, exceeding the number of Chinese citizens. Close to 55 million of these trips are expected to be made by air.

Chinese Tourists will take 2.9 billion domestic trips during this year's spring festival - U.S. Global Investors

For the third straight year in 2015, China topped the list of international outbound travelers, with 120 million people heading abroad. Collectively, they spent $194 billion across the world.

6 Million

Not all destinations are within China’s borders, however. According to CTrip, a Chinese online travel service, Spring Festival tourists have booked a record 6 million outbound trips. As many as 100 different countries will be visited, with the farthest region being Antarctica.   

180 Tonnes

A shaky stock market, depreciating renminbi and low global prices have spurred many Chinese consumers to turn to gold. Imports of the yellow metal are way up. Last month I wrote that 2015 was a blowout year, with China consuming more than 90 percent of the total annual global output of gold. In December, the country imported 180 tonnes from Switzerland alone, representing an 86 percent increase over December 2014. This news supports the trend we’ve been seeing of gold moving West to East.

The Great Tectonic Shift of Physical Gold From West to East

The precious metal is currently trading at a three-month high.

49.4

For the month of January, the Chinese government purchasing managers’ index (PMI) eased down from 49.7 in December to 49.4 in January, indicating further contraction in the country’s manufacturing sector. The reading remains below its three-month moving average. More easing from China’s central bank, not to mention liberalization of capital controls, could be forthcoming this year to stimulate growth and prop up commodities demand.

Chinese Manufacturing Sector Continues to Shrink
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$6.5 Trillion

Although manufacturing has cooled, domestic consumption in China is following a staggering upward trajectory. In 2015, total retail sales touched a record, surpassing 30 trillion renminbi, or about $4.2 trillion. By 2020, sales are expected to climb to $6.5 trillion, representing 50 percent growth in as little as five years. This growth will “roughly equal a market 1.3 times the size of Germany or the United Kingdom,” according to the World Economic Forum.

By 2020, Chinese Private Consumption Will have Grown $2.3 Trillion
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109 Million

One of the main reasons for this surge in consumption is the staggering expansion of the country’s middle class. In October, Credit Suisse reported that, for the first time, the size of China’s middle class had exceeded that of America’s middle class, 109 million to 92 million. As incomes rise, so too does demand for durable and luxury goods, vehicles, air travel, energy and more.

109 Million for the first time, the size of China's middle class has overtake the U.S., 109 million compared to 92 million.

But middle-income families aren’t the only ones growing in number. The World Economic Forum estimates that by 2020, upper-middle-income and affluent households will account for 30 percent of China’s urban households, up from only 7 percent in 2010.  

$1.6 Trillion

China's e-commerce consumption Set to Grow Over 160% Between 2015 and 2020

Consumption has also benefited from the emergence of e-commerce. Not only are younger Chinese citizens spending more than ever before, they’re doing it more frequently, as e-commerce allows for convenient around-the-clock spending. Such sales could grow from $0.6 trillion today to a massive $1.6 trillion by 2020.

Mobile payments will continue to play a larger role as well. Purchases made on a smartphone or tablet are expected to make up three quarters of all e-commerce sales by 2020.

24.6 Million

With a population of more than 1.3 billion, China is the world’s largest automobile market. The country certainly retained the title last year, selling 24.6 million vehicles, an increase of 4.7 percent over 2014. The U.S., by comparison, sold 17.2 million. According to China’s Ministry of Public Security, the Asian country added a staggering 33.74 million new drivers last year, which is good news for auto sales going forward.  

6.5 Percent to 7 Percent

Many China bears point out that GDP growth in the Asian country has hit a snag. There’s no denying that its economy is in transition, evidenced by the government’s 2016 growth range of between 6.5 and 7 percent, a demotion from 2015’s target of 7 percent. But it’s important to acknowledge that China is still growing at an enviable rate.

Here’s one way to look at it, courtesy of Jim O’Neil, the commercial secretary to the British Treasury and the man who coined the acronym BRIC (Brazil, Russia, India, China). O’Neil calculates that even if China grows “only” 6.5 percent this year, the value is still equivalent to India growing 35 percent or the United Kingdom growing 22 percent.

For this reason and more, China remains a long-term growth story, and “there are many reasons to expect that in 10 or 15 years, China will be a greater, not a lesser, power than it is today,” says Stratfor Global Intelligence.

To all of my friends and readers both here and abroad, I wish you copious amounts of happiness, health and prosperity this Chinese New Year!

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The purchasing manager’s index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

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Recession on the Horizon? Look at the Big Picture
February 1, 2016

Central Banks Could be running out of tricks to stimulate their economies. U.S. Global Investors

Today the Bank of Japan (BoJ) rattled global markets on Friday by announcing its adoption of a negative interest rate policy intended to spur banks to lend and consumers to spend. The world’s third-largest economy, then, joins a handful of European countries who are experimenting with less-than-zero rates, among them Denmark, Austria, Switzerland and Sweden, which I’ve written about previously.

The BoJ’s move is just the latest to suggest that global central banks’ bag of tricks to stimulate growth is quickly running empty, and that the imbalance between monetary and fiscal policies continues to accelerate. Negative rates charge banks for parking excess cash and ultimately punish savers, yet make gold more attractive.

Already companies and individuals are more indebted than ever before.

Bloomberg reports that corporate leveraging around the world has reached an unprecedented, and arresting, $29 trillion. In 2015, debt reached three times earnings before interest, taxes, depreciation and amortization, a 12-year record. An estimated one third of these companies, meanwhile, are unable to generate enough returns on investment to cover the cost of credit.

Global Corporate Debt-to-Earnings Ratio Is at a 12-Year High
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If this is a debt bubble, it only adds to speculation that we’re headed for a global recession. As I mentioned recently, several prominent voices, including George Soros and Marc Faber, believe recessionary forces are growing stronger, precipitated by struggling commodity prices and surging global debt.

It might be hard to remember after a nearly seven-year equity bull market, but we’ve been here before.

Credit Suisse looked at 14 recessionary pullbacks between 1929 and 2008 and found that the S&P 500 Index, after lasting an average 298 trading days, declined an average 33 percent. Some of these recessions, obviously, lasted longer and were more severe than others, such as the most recent one that lasted between 2007 and 2009.

Since 1929, the S&P 500 Index Has Averaged a 33% Decline During Recessionary Pullbacks
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But each of these pullbacks, Credit Suisse notes, provided ample buying opportunities in U.S. equities. Rebounds following the recessions averaged 62 percent—80 percent following the 2007 financial crisis.

How to Invest When Stocks Make You Worry

Whether or not a recession is imminent, I believe it’s a good idea for investors to be prepared by having a well-diversified portfolio, including assets such as gold and municipal bonds. Gold has tended to have a low correlation with stocks, meaning that even when stocks were tumbling, it’s managed to retain its value well. The same can be said for short-term, high-quality munis, which have been shown to offer a greater amount of stability than some other types of securities, even during market downturns.

In 2015, munis, as represented by the Barclays Municipal Bond Index, were actually the top fixed-income asset class, beating both Treasuries and corporate debt. They also outperformed S&P 500 Index stocks, returning more than double what equities delivered.

Muni Bonds Outperformed Other Major Bond Categories in 2015
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Muni fund inflows gained momentum in the second half of 2015 as global stock markets began to show signs of trouble, and so far this year, investors are piling into munis at a rate of about $1 billion per week.

The last couple of decades were among the most volatile, with the tech bubble and financial crisis challenging markets. Out of more than 31,000 equity and bond funds during this 21-year period, only 0.12 percent of the total number, made up almost completely of municipal and short-term bond funds, managed to delivered positive returns on a consistent basis. Learn more about the $3.7 trillion muni market!

Did Russia Just Blink?

Several forecasts last week suggest oil prices are unlikely to recover in 2016—and might fall even further.

Morgan Stanley says crude could reach $20 per barrel as the U.S. dollar continues to strengthen. The U.S. Energy Information Administration (EIA) predicts that we might not see supply and demand start to rebalance and prices recover until late 2017. And the World Bank lowered its 2016 forecast for crude oil prices, from $51 per barrel on average to $37 per barrel. The downward revision is based on a number of factors, including sooner-than-expected oil exports from Iran, a mild winter in the Northern Hemisphere and, most significantly, continued imbalance between global supply and demand. U.S. producers have been much more resilient than expected to lower oil prices.

But talk that meaningful production cuts are on the horizon led oil higher last week, helping it achieve its first three-day winning streak of the new year. In the global production staring contest, it appears as if Russia blinked first, as it just expressed an interest in reaching terms with the Organization of Petroleum Exporting Countries (OPEC) on output cuts.

Like Saudi Arabia, Nigeria, Iraq and Venezuela, Russia greatly depends on oil exports, the revenue from which makes up about half of its government’s total revenue. The country averaged 10.5 million barrels a day in 2014, making it the world’s third-largest oil producer after the U.S. and Saudi Arabia. Coupled with Western sanctions for its involvement in Ukraine, low prices have wreaked havoc on Russia’s economy, which contracted 3.7 percent in 2015 and is expected to fall another 1 percent this year. The ruble, which closely tracks the decline in Brent oil, has lost approximately half its value against the U.S. dollar in the last two years.

Russian Ruble Has Tracked Brent Oil's Decline
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Reaching a production cap deal with OPEC, whose members are collectively responsible for about 40 percent of the world’s output, would help rebalance supply and demand and firm up prices.

Oil has historically bottomed in the month of January, and it appears that we finally found a bottom. It remains under pressure, but we could see oil climb to between $38 and $40 per barrel over the next three months.

In the longer term, things look more constructive. Oil will continue to be the world’s most important source of energy for at least the next couple of decades, according to a new report from ExxonMobil. We should expect to see a 25 percent increase in energy demand by 2040, which is like adding another North and South America.

Looking at transportation fuels, natural gas demand is expected to grow the most—300 percent between 2014 and 2040. Jet fuel should climb 55 percent as air travel demand increases in emerging and developing markets.

Global Transportation Demand by Fuel Type on the Rise
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China Still a Long-Term Growth Story

Higher Incomes in China Spur Demand for Durable Goods

By 2040, the world population should surge to nine billion, with a greater percentage of people than ever before demanding affordable, reliable energy for their homes and businesses.

Even though its demand for materials and commodities has cooled in the last year, China should continue to see huge consumption growth in durable goods for many years to come as its GDP per capita expands.

Back in October, Credit Suisse reported that the size of China’s middle class had, for the first time, overtaken the size of the American middle class, 109 million adults compared to 92 million. As this group increases in number, so too rises the demand for durable goods, vehicles, energy and other things we expect to find in a middle class lifestyle.

109 Million for the first time, the size of China's middle class has overtake the U.S., 109 million compared to 92 million.

In a report last week, McKinsey & Company’s Gordon Orr urges readers to focus on the absolute scale of China’s economy, not just slowing growth.

“No matter what rate the country grows at in 2016,” Orr writes, “its share of the global economy and of many specific sectors will be larger than ever.”

For forward-looking global investors, that’s optimistic news indeed. 

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Barclays Municipal Bond Index is an unmanaged index representative of the tax-exempt bond market.

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Comparisons to 2008 Spark Gold’s Fear Trade
January 25, 2016

Are we headed for another 2008? George Soros thinks so.Plunging oil prices, rising market volatility, surging global debt—it’s all beginning to remind some investors of 2008. Earlier this month, billionaire former hedge fund manager George Soros warned of an impending financial crisis similar to the last major one, which sent shockwaves throughout global markets.     

The comparisons to 2008 have triggered gold’s Fear Trade, with many investors scrambling into safe haven assets. Jeffrey Gundlach, the legendary “bond king,” recently made a call that amid further market turmoil, the metal could spike as much as 30 percent, to $1,400 an ounce.

Making such predictions is often a fool’s game, but there’s no denying that gold demand is on the rise, both in the U.S. and abroad. For the one-month period ended January 20, gold (and silver) outperformed, comfortably beating domestic equities as well as a basket of other commodities.

Precious Metals on Top in 2016
click to enlarge

I’ve already shared with you the fact that gold has historically had a low correlation with equities. This point is worth reiterating: When equities have zigged, gold has zagged. And with volatility high in global markets right now, many investors are choosing to rotate a portion of their portfolios into the precious metal.

Marc Faber suggests that it might be a good time to get back into gold.

This was the advice of my friend Marc Faber, who recently warned investors in his influential “Gloom, Boom & Doom Report” newsletter that global stocks could fall an additional 40 percent on mounting liquidity and debt problems. In the event such a crisis occurs, Marc says, investing in gold—which, again, has been shown to be inversely correlated with stocks—might be one way to protect one’s wealth.

I’ve always recommended a 10 percent weighting in gold: 5 percent in physical bullion, the other 5 percent in gold stocks or mutual funds. This applies in all market conditions, good or bad.

Something else I want to draw attention to in the chart above is the extreme divergence in performance between gold and oil, which is trading at levels we haven’t seen in a long while. Declines in oil have traditionally invited enormous selloffs in other commodities, making gold’s resilience at this time all the more impressive.

China Consumed Nearly All of Global Gold Output in 2015

Investors in China appear to recognize the importance of gold in times of market uncertainty. Since June 2015, the Shanghai Composite Index has dropped close to 45 percent, prompting scores of retail investors to pivot into safe haven assets such as gold. As you can see below, 2015 was a blowout year for the Shanghai Gold Exchange (SGE), which in the past has served as a good measure of wholesale demand in China.

Physical Gold Delivered from Shanghai Gold Exchange (SGE) vs. World Mining Output
click to enlarge

Not only did gold deliveries climb to a record number of tonnes in 2015, they also represented more than 90 percent of the total global output of the yellow metal for the year.

The SGE has made it incredibly easy for Chinese citizens to participate in gold investing. Recently it rolled out a smartphone app, making it more convenient than ever before to open an account and begin trading.

Gold Miners Are Winners of the Currency Wars

Gold priced in the strong U.S. dollar might have netted a loss in 2015, but in many other parts of the world, prices were either stable or even made gains. For buyers of gold in non-dollar economies, it’s the local price that matters most, not the dollar. In Russia, the third-largest producer, the metal rose 12 percent—and came close to an all-time high. In South Africa, the sixth-largest, it was well above the all-time high. Investors there saw returns of greater than 20 percent in 2015.

Gold Was Positive in Non-Dollar Currencies
click to enlarge

This has been beneficial to many mining companies based outside the U.S. Operations are paid for in local currencies—most of which have weakened in the last year—but companies sell their production in U.S. dollars. This has helped offset the decline in gold prices since they peaked in 2011.

Canadian-based companies such as Claude Resources, Richmont and Agnico Eagle Mines are performing well, even in the gold bear market and amid high volatility.

Canadian Gold Stock Performance
click to enlarge

For the last three years, gold miners all over the globe have been thoroughly beaten up. Today, they’re heavily discounted, and there are signs that conditions are stabilizing.

Managing Expectations

With the Fear Trade heating up, it’s important that we manage our expectations. The length and extent of the current bear market, which began in September 2011, might seem unprecedented to many investors. In actuality, it doesn’t veer very far from what we’ve seen in the past, according to data presented by the World Gold Council (WGC).

Current Gold Bear Market Not Far off the Mean
January 1970 – January 2016
Current Gold Bear Market Not Far off the Mean BULL MARKET Current Gold Bear Market Not Far off the Mean BEAR MARKET
Dates Length (months) Cumulative Return Dates Length (months) Cumulative Return
Jan 1970 -
Jan 1975 
61 451.4% Jan 1975 -
Sep 1976
20  -46.4%
Oct 1976 -
Feb 1980
41 721.3% Feb 1980 -
Mar 1985
61 -55.9%
Mar 1985 -
Dec 1987
33 75.8% Dec 1987 -
Mar 1993
63 -34.7%
Apr 1993 -
Feb 1996
35 27.2% Feb 1996 -
Sep 1999
43 -39.1%
Oct 1999 -
Sep 2011
144 649.6% Sep 2011 -
Present
52 -44.1%
Average 63 385.1% Average 47 -44.0%
Median 41 451.4% Median 52 -42.7%
Source: World Gold Council, U.S. Global Investors

Reaching back to 1970, the WGC identified five bull and bear markets, with bull markets defined as periods when gold prices rose for longer than two consecutive years, bear markets as the subsequent periods when they fell for a sustained length of time. Although these lengths vary, the cumulative loss in each bear market is relatively uniform, with median returns at negative 42.7 percent.

The present bear market, at negative 44.1 percent, falls easily within the realm of normalcy.

Further, the table suggests that a turnaround in gold prices is overdue.

This past Sunday I spoke at the Vancouver Resource Investor Conference. In the coming days, I’ll share with you what I saw and heard from fellow investors in the resources and commodities space. Stay tuned!

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The Thomson Reuters Core Commodity CRB Index, created in 1957, is an equal-weighted index of 19 commodities. The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2015: Claude Resources Inc., Richmont Mines Inc., Agnico Eagle Mines Ltd.

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Net Asset Value
as of 02/22/2018

Global Resources Fund PSPFX $6.17 0.01 Gold and Precious Metals Fund USERX $6.94 -0.01 World Precious Minerals Fund UNWPX $4.18 -0.04 China Region Fund USCOX $11.80 -0.07 Emerging Europe Fund EUROX $7.84 0.06 All American Equity Fund GBTFX $25.22 No Change Holmes Macro Trends Fund MEGAX $19.33 -0.19 Near-Term Tax Free Fund NEARX $2.20 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $1.99 No Change